Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

The DOW was at 11K in July 2006, then it rose to over 14K. The housing market turned sour in August 2005. As Joe Biden would say, let me repeat that. The DOW gained 3,000 points a year after the housing market turned sour. Pretty clearly that 3,000 point move was a bubble as the investor class moved their chips from the blackjack table to the craps table, er, the stock market. Who would have thought the collapse of housing would affect stocks? Anyone with a brain, which excludes most of the people who regularly trade stocks.

Under that short term bubble lies the mother of all bubbles. It’s been growing for 30 years, ever since baby boomers started moving money from savings into stocks. The siren’s call was higher yields, though in the long run there is no reason to believe that a higher yield is sustainable. Eventually risk takes a cut.

Should the DOW be 7,500? How about 5,000? The only way to know is to take a real valuation of the companies, rather than the greater fool valuations Wall Street has been quoting as fact since the late seventies. At the end of the day, the only price that matters is the price where the company is willing to buy back shares because it believes they are undervalued.

All the “fundamentals” and fed watching is part of a collaborative con game, an organized religion of people who believe for no earthly reason that above average growth is infinitely sustainable. The only reason “benchmarks” mattered was because the vast majority of you were playing the game by the same rules, but it was always just a game. It hasn’t been about value since the focus shifted from dividends to share prices.

If a share isn’t paying out, it’s worth zero, unless a greater fool comes along. We’ve incubated two generations of greater fools. Even now, with reality staring them in the face, they are still talking about fundamentals and when it will be a good time to buy. The game is all they know.

I went to all cash September of 2007. You are crazier than a shithouse rat if you get into the market now… can anyone say Dow 4,000?? Remember, the market can remain irrational longer than you can remain solvent.

Barry,
Your blog is the proper application of the Rumsfield speech quote on Milton Friedman’s birthday which was celebrated at the Bush White House: “Ideas have consequences”. Telling the truth without an agenda (no cherry picking) is the idea which makes this blog so useful. I thank you and all those who speak from their heart and soul here. And to those who are grateful to any of my comments, I say pass it on. There is so much lying out there that we need all the truth tellers we can get.
And thank you to those who wish to help local businesses in the George Baily model. This leads me to a pet peeve. Why do waiters, paper carriers and assorted people on the lower end of the economic ladder have to be the first to suffer in these times. Hey you! RAISE your tips; don’t lower them. They didn’t screw you. Help them too.

Mentions above of David Tice. Wow. And remember Mark Haines screaming at Peter Schiff throughout 2007? Maria B. squealing at Dow 14k? Like most, I didn’t want to hear what Schiff was saying, or Shiller, or Barry.

Fortunately I finally began to break after listening to the Tom Keene interview of Roubini maybe a month or six weeks ago. Started heading to cash though should have sold it all of course or gone more short. Still better off than the average hands-off holder.

Like others I was waaaaay up early in the year (oil, ag and miners) and seriously thought about selling in May and going away. Instead I stayed in at least partly on the “presidential year” premise.

Lesson: All that stuff is folklore. Now is now and “this time” really can be different.

I’m thinking that this is going to be similar to the Crash of ’29 — which dropped the DJIA about 93% over a period of 33 months between October 1929 and July 1933. That was the collapse of a stock market bubble fueled by 10% margin requirements and widespread public participation in the markets. Near the peak, there was a widespread belief that it was impossible to lose money in the stock market.

This is basically the collapse of a real estate bubble, fueled by nothing-down mortgages, commoditization of mortgage debt, 30:1 leverage in the broker-dealer industry, government encouragement, widespread corruption, and a faith and belief that housing prices could never decline. The stock markets are only getting caught in the splatter from the demise of the debt markets, as corporations require credit to function.

So far we are about 12 months into this. It should proceed more quickly, due to automated order entry and trading systems, allowing things to fall a lot faster than they did between 1929 and 1933. We have entered a very steep part of the slide now, and the next few days should be very exciting, historic even.

Fair warning — it is too late to make any portfolio changes at this point, IMHO. Trading in the markets over the next few days will not be like trying to catch the proverbial falling knife, but more like trying to catch a falling (running) chain saw, amid a hailstorm of anvils. Odds are that order entry systems will fail anyhow. You have been warned.

That said, it might be fun to watch. These next few days are destined to enter the history books, and you will NEVER see anything remotely like them again in your lifetimes. I think it’s a near-certainty that they will close the exchanges at some point, as they have no plan to deal with things, and there are no fools left that are willing to buy. Only sellers remain. Savvy and knowledgeable traders are decrying the breakdowns of their technical market indicators, and no one has a clue as to at what level we will hit bottom. Fundamentalists say that PE ratios indicate that valuations have a lot farther to go before reaching “historically cheap” levels. Dow 7000 is certainly possible. An 80% drop from the peak would indicate a DJIA of around 2800, if that metric has any value anymore.

A pity that this did not happen a but farther into the future, as it would make for an excellent Halloween.

Another vote of thanks. I went 50% cash back in Jan. The other 50%? gulp – still in various fidelity, troweprice, & american century mutual funds – midcap, large, international. Most of it aggressive growth too. At least I could’ve rebalanced a bit DOH!

If anyone is interested, I pulled together an admittedly simplistic spreadsheet tracking S&P cycles back to 1952. It appears that only two cycles have had worse declines over the past 50 years — Apr 2000 to Sep 2002, and Oct 1972 to July 1974. The spreadsheet is posted online via Google Docs at:

I want you to buy some of that Lehman dreck tomorrow and prop this market up…Karen says you have a desk made out of solid Krugerrands that you ate the last two Whoppers on…you could trade that in and save the economy.

And call George W. and tell him to wait until the markets close. And yes, I voted for him. And yes, wish I hadn’t…but I’ve met Al Gore…and…um.

The 75-year experiment with ‘Keynesanism’ has proved to be a Total Failure/Complete Swindle for the ‘little Guy’ it was supposed to ‘protect’.

Shielding Children, and the Infirmed, is one thing, Shielding Adults, keeps them as children(see: most Baby Boomers).

It’s Over. We’ve two choices: 1) We can sack up, and go back to the beginning, again, keeping the ‘Gov’t’ Chained, or 2) We can keep believing the unbelievable, ‘Cained Peep-estilio, and see our ‘protector’ forge ever more links, ensuring our Slavery.

But, past that, if you have any other misquotes to attribute to me, or quotes, of mine, that you can take out of context, feel free..

jm,
I was looking at that question, too. I think the answer is: The 4000 to 6000 range. That is a bit of an overshoot at the low end and a shade to high at the high end, but I still think it is about right.

“Why is this book out of print? I think that Hasset’s predictions, if anything, were merely slightly ahead of their time. Like Aristotle, Picasso, and Bonaparte, his genius will only be fully understood long after he is dead and gone.”

Oct. 9 (Bloomberg) — Investors pulled a record $52.1 billion from U.S.-managed stock and bond mutual funds in the past week, seeking the safety of government-insured bank deposits as the financial crisis worsened.

Shareholders took $43.3 billion from stock funds and $8.8 billion from bond funds in the week ended Oct. 8, according to data compiled by TrimTabs Investment Research in Sausalito, California. The exodus followed $72.3 billion of outflows in September, the most in a single month. Investors deposited $185.5 billion into bank accounts last month through Sept. 22, TrimTabs said, citing U.S. Federal Reserve data.

“People are scared,” Conrad Gann, TrimTabs’ chief operating officer, said in an interview. “This market is different from what we’ve seen before.”

I have CoWorkers that work for CMSE (Choctaw Enterprise). Principal Financial just sent a notice that the PFG sponsored Real Estate 401 K fund is FROZEN until 2011…due to the non liquid markets. This letter went out in the mail, probably on Monday.

3. Then maximum flexibility means, by definition, that the pol CAN move against the citizen because nothing is out of bounds. And by my God given rights, I will have to resist. Think Minute Men and Sam Adams.

So how has the Fed saved the dollar, or stopped inflation? Why did the Fed let the Depression go from ’29 until mid ’39? And while we are at it, why was the unemployment rate 21% and RISING in 1938.

Posted by: Mace | Oct 9, 2008 8:38:41 PM

Mace,

the GD was a massive PsyOp to emasculate and domesticate the American People. Even, B. Bernanke admits that the FedRes caused/triggered the start of it. You should read some Histories of those Days. The Nature of the Republic was, henceforth, Changed. All roads, Economic, truly led to W-D.C., every Industrial vertical was controlled by their own Gov’t panel of bureaucrats, every price legislated, by fiat, to be paid in Fiat. And on, and on..

This time, unlike 1980, Reagan won’t entering, from stage-right, to resuscitate the dying Corpse of Keynesian folly for another round of Subtraction by Distraction, Financial ed.. There isn’t that much left to be concerned with. Now, again, it’s about the Future, and it isn’t about Cash, it’s about Control.

Mark…agree. We are going to have massive experimentation. USA a big science project to prove Econ 101 does not work, that we can cool the globe, and stop the oceans from rising. And then…after about 3-4 months of those fiat controls…we’ll say, dude – from where does my food come?

But I am optimistic. My Dad said we can always come home and raise that garden on the land….Sweet potato pie and shut my mouth.

Retirement Savings
The market decline is hurting many people that are close to retirement. This is a very sad time for those that depended on their government and trusted the institutions. The leading edge of the baby boomers were predicted to have a negative impact on spending and on the stock market as they shifted en masse into retirement. With many being wiped out as they are set to enter this period of their life is a far worse outcome than ever expected. Please look after your parents!

Aging Japanese population
Japanese demographics leads that of the US by several years, so perhaps that profile might lend some insight or validity as a reference point. The Japanese are doing alright without a stellar stock market.

Busted
Nikkei: From its peak in 1989, this index zigged and zagged 80% down a rocky slope into 2003. Along the way, there were some amazing bear market rallies of 18%,35,50,31,59,62 (approx) before finally hitting the 2003 bottom. Out of these ashes the index sprang 137% from 2003 to 2007 but has since has fallen back 50% from the 2007 peak. Perhaps it will take out that 2003 low.

From 1989 to present there were seven declines averaging 41% and 7 rallies averaging 56%.

Back to the US
You may speculate that the US stock market is in far worse shape than 2002-3. If so you should not be surprised if the lows of 2002-3 were eventually violated. Financials have paved the way; as the crisis chokes the rest of the economy many sectors will likely tumble. Credit contraction is a destructive spiral of shockwaves. Looking at these long term cycles the mid point between extreme pessimistic and optimistic scenarios is still much lower.

S&P: ttm P/E’s are around 17. If/as earnings fall, prices must come down. Worst case is earnings stay flat and stock-disgust leads to P/E’s of 10-12. That means 530-600 on the S&P500 is a realistic target. Can you believe that? What if earnings fall 50% and P/E’s fall to 8? That is capitulation material, not P/E’s > 15.

The tsunami is rumbling, and the VIX can exceed 100. Perhaps there are still too many rally-callers in the crowd to call the cyclic bottom just yet. In bull markets the pessimism is usually a good contrarian signal, but in bear markets I think it just means things can get worse. The secular bear began in 2000 so the intermediate lows of 2002 are not sacred and should at least be tested. Besides- is this not the doomsday – the 4th turning – the end of Maya?

I hope the bright side is that the mess should be dissipated enough for the next generation to build anew and prosper (that is if if the FED can just stop spending their future dollars).

I’m with you. 5000-6000 is where the bottom will be. Physical gold and select gold stocks until then. For a look at the future try looking at Argentina’s Merval during the period when their currency collapsed for a preview.

Yes… I know. Sorry about all the thinking. Today was a slaughter. If it makes you feel better….. I was givin my business enviornment(Ethics) class hell as I took all of them to school in economic history and how it relates to the current crisis. Also, I was amazed at the general lack of knowledge by my fellow students. I feel like I’m a rare bird that actually goes to the library and studies for hours and hours reading books that I have to knock the dust cake of of to read. I hope that at least I will get to finish school as we enter this period of do-do. I’m really glad to be able to speak to you folks who understand. At school I feel like I’m always explaining s*** to people. And then….. They still don’t get it even after I “dumb it down”…..

Thanks all,

Econ 101
Student of Business Finance(Major), with a double minor in International Economics and Political Economy.<<<< I really love to study these topics. P.S. I jest about the irony of Econ 101 as we all know which school that falls under….LOL.

I made my prediction of DOW 6000 on September 14, 2008 and I’m sticking with it. It ain’t just subprime – lop off 20% of everything that was financed – it was all loopy securitized stuff, with money “loadned” to individuals and businesses that have no hope of paying it back. And yeah, my 401k is off 30% – but fantasy is what got us into this mess.

with this: “Sorry about all the thinking.”, as I told you b4, never apologize.

and, the bad news, with this: “Also, I was amazed at the general lack of knowledge by my fellow students. I feel like I’m a rare bird that actually goes to the library and studies for hours and hours reading books that I have to knock the dust cake of of to read.” , is, that, it never seems to change.

but, with this: “I’m really glad to be able to speak to you folks who understand.”, the good news is that there are those, again, seemingly, always, that know: ‘If you don’t Pay attention, it’s going to Cost you.’.

this: ” At school I feel like I’m always explaining s*** to people. ” is funny, reminds me of an ECON 410 class, that I had second-semester Freshman year, where, much to the chagrin of my Sr. classmates, that wanted nothing more than hit the job-market, I had to keep correcting the fundamentals errors the ‘Prof.’ was making..

only brought up to lead to this: “I hope that at least I will get to finish school as we enter this period of do-do.”–don’t worry about it, ‘school’, as you know, is a mere social construct. There will always be those that understand: “Self-education is Preservation.”

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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